When to Create a C Corp
Choosing the right business structure can have major implications for taxes, liability, and long-term growth. A C corporation offers distinct advantages. At the same time, they can be complicated and costly to set up, so it is certainly not the right option for every situation. Here, our Fremont business formation lawyer provides a guide to C corporations, including an explanation of the structure, the advantages and disadvantages, and examples of when to create one.
What is a C Corporation?
A C corporation (C corp) is a legal business structure that is wholly separate and distinct from its owners. It is the most common type of corporation in the United States. A C corp can enter into contracts, own assets, sue and be sued, and is taxed independently of its owners. One key feature is that profits are taxed at the corporate level and again at the shareholder level when distributed as dividends. Indeed, the California Franchise Tax Board explains that a C corp pays taxes on its earnings directly. The shareholders of the C corp are taxed separately from the business.
Know the Advantages and Disadvantages of a C Corp
The Benefits of a C Corp
As a C corp is a fully distinct legal entity, it offers very strong liability protection. Shareholders are shielded from personal responsibility for business debts and lawsuits. Further, a C corp also allows for unlimited shareholders. That makes it an attractive structure for raising capital and attracting investors. C Corps can also issue multiple classes of stock. The flexibility in ownership and fundraising makes them a great business entity for companies that have massive growth potential.
The Drawbacks of C Corp
C corps are not right for every situation. One major drawback of a C Corp is double taxation. Remember, the profits are taxed at both the corporate level and again when distributed to shareholders as dividends. C Corps also face extensive recordkeeping, regulatory compliance, and reporting requirements. That can increase the start-up costs and administrative costs.
Examples of When to Create a C Corp in California
You Plan to Raise Venture Capital
Most venture capital firms require investment in a C corporation because it allows for preferred stock and scalable equity structures. Forming a C corp in California positions your business to raise money from outside investors.
You Intend to Go Public in the Future
C corps are the required structure for companies that want to file an initial public offering (IPO). Establishing a C corp early helps to position a business for going public.
You Want to Offer Stock Options to Employees
C corps can issue stock options and other equity incentives that are attractive to top talent. It is a significant benefit because it can make it easier to recruit and retain employees in California’s competitive business environment.
You Anticipate Substantial Profits That Will Be Reinvested
A downside of a C corp is that it is subject to double taxation. However, an advantage of being taxed separately from their owners is that these businesses can reinvest profits without immediate tax consequences for shareholders. It is a strategy that can help grow the company.
Contact Our California Business Formation Lawyer for C Corps Today
Lynnette Ariathurai is a California business formation attorney who has the knowledge and experience that companies can trust. If you have any questions about creating a C corporation, we are here to help. Contact us today for a strictly confidential consultation. From our Fremont office, our firm works closely with C corps throughout the Bay Area.